Question 1: Rent Seeking Run Amok

Mailboxes are flooded with direct mail fliers.  The roadsides are littered with plastic signs.  We are admonished to Vote Yes On Question 1 on November 7.  This is one of the clearest examples of rent seeking behavior I have ever seen.  It is text book quality.

Rent seeking occurs when an economic actor, in this case a casino developer, attempts to get the rules of the economy rigged in its favor.  Most effective rent seeking is done by promising what appears to be a public benefit as the primary motivation for rules that favor one economic actor.  If you are to believe the flyer that showed up in my mail box, Question 1 is designed to improve education, lower taxes, support veterans, and foster the harness racing industry.  The only deserving groups that appear to be missing are orphans and lepers.

The Rent Seeking: What Question 1 does is allow one entity the right to build a casino with slot machines and table games in York County.  Who is that entity?  According to the language for the statute we are voting on from the Maine Secretary of State web page that casino developer is:

“…any entity that owned in 2003 at least 51% of an entity licensed to operate a commercial track in Penobscot County that conducted harness racing with pari-mutuel wagering on more than 25 days during calendar year 2002…”

Wouldn’t it be more honest just to name “the entity”?  Who is it to whom we are granting this monopoly?  I’ll just call it the rent seeker, the one offering a pot full of honey in return for its exclusive advantage.

The Honey Pot: The language in the proposed law that we will vote on in November outlines the beneficiaries, various groups that will receive a share of the “net revenues” from slot machines and table games.  (Who gets to decide what costs are subtracted from gross revenues to calculate “net revenues?)  The distribution is one percent here, three percent there, and so on.  In classic rent seeking style these pots of money are meant to both create allies for the proposal among groups that might otherwise not care who gets to run a casino in York County.  The goal of the honey pot is to create a sense in the larger community that this vote is not about a monopoly for a casino developer but is about furthering the common good.  The shell group running the campaign is called Progress for Maine.  Who can be against creating progress, a common claim of rent seekers?  And who are they?

Who We Are:  This is the label for one of the pages on the web site.  I naively thought I might find out who met the criteria for getting this York County casino monopoly by clicking on this.  Not really — the page says:

“We are a coalition of businesses and individuals who want to promote economic prosperity throughout the state of Maine by building a gaming and entertainment venue that would contribute millions to our local economy.”

A more forthright answer might have been the names of the developer and investors in “the entity” who is going to be the primary beneficiary from Question 1, that is, the rent seekers, the ones promising grand economic benefits for Maine.

Read the Economic Impact Study:  That is what told me to do, so I did.  I was struck that the study was cursory and misleading.  It uses “projections” from the developer (who was that again?) for construction costs and operating revenues and then applies simple multipliers from standard regional economic models to project employment, income, and taxation impact estimates.

As an economist, two things jump out to me from this study.  One is that there is no independent verification of whether the projections these impacts are based on are reasonable.  We do not even know who made the projections.  Second, and more significantly, the unstated assumption of this analysis is that these expenditures for gaming, dining, and lodging at some yet to be determined location in York County are all new expenditures.

Any regional economist will tell you that economic impacts from expenditures by Maine residents at a new facility are negligible.  The assumption you must make in such an impact study is that expenditures by residents are diversions from other activities that would have happened elsewhere in the state.  Money spent by residents at a new facility is assumed to be money that would otherwise have been spent on some other form of consumption in Maine.  They do not increase overall economic activity.

So for the authors of this study to declare “the project would generate….”, as they do time and again,  is misleading at best.  Likewise, any expenditure at this facility by non-residents would only count as increases in economic activity for Maine if these non-residents are making additional new visits to Maine for gambling at this facility.  The only increase in Maine GDP that can come from such a facility is if it creates net new expenditures in the state.  Clearly the claimed increases in tax collections and in Maine GDP are exaggerations.  Since the authors do not even acknowledge the issue of residents versus non-residents in their study, I wonder about all of their conclusions.  Not surprisingly, there are no estimates of the monopoly profits estimated to go to the rent seekers.

Rent seeking has become increasingly common in the American economy.  This contributes to a sense that the economy is rigged against those who are willing to play by the rules, rather than have those rules twisted to give unfair advantage in the guise of public good.

If a casino is a good idea for York County, let’s have the Legislature decide who gets to build it, what its taxation rates should be, and where the proceeds of those taxes are to go.  Do we want public policy established by some unnamed casino developer?

Mark W. Anderson

About Mark W. Anderson

I am proud to be a Mainer, born in Caribou and schooled at Brewer High School, Bowdoin College, and the University of Maine. I am grateful for a 35 year career at UMaine, the last decade in the School of Economics.